We have heard of market cycles in which every bull run is followed by a bear phase and every bear run ends with the initiation of a bull phase. The stock markets have been observed working in this pattern forever but in the last decade bear phases have become shorter and bull phases have become longer. After March 2020 dip NIFTY saw one of the fastest bull runs in the history of Indian Markets which continued till Jan 2022. We entered into the Year 2022 with an optimistic view but an inevitable market cycle followed us.
How Markets have been till now?
From January 2022 highs to June 2022 lows NIFTY has corrected 17.3%. There have been many reasons for this but the most prominent ones have been rising commodity prices, an increase in bond yields amid aggressive US Fed view, and the Russia-Ukraine war worked like oil in the fire. Recession is also feared in the US which has resulted in depletion of NIFTY PE multiple from 35 in Fed-21 to around 19 in Jun-22.
Russia-Ukraine has been the main character in this story of market turbulence as a conflict between both countries has resulted in trade wars across borders. This has caused commodity prices to surge, especially crude oil which touched the $138 per barrel mark after Aug-08, thereby initiating an inflation scare. US 10-year bond yields also rose to levels of 3.5% after 11 years, making US Federal Reserve and RBI turn hawkish, triggering the Nifty PE multiple to decelerate.
What’s the current scenario?
The markets are in a gradual tide that is turning in favor of bulls, as an ongoing dip in metal & crude prices in addition to the recent market correction augur well for equity valuations. US 10-year bond yield has also stabilized at 3% from 3.5% indicts market has discounted future fed rate hikes, same goes with India G-sec 10-year bonds. Crude has also fallen below $100 which gives comfort to Fed as well as to RBI for their inflation projections. On the flip side, the US economy is expected to fall into a recession trajectory and the US dollar index is trading above 108 since 2002 which may post some uncertainty going ahead.
What Lies Ahead for Indian Markets?
Our proprietary wealth model suggests we may see volatility continue for the next few months. As per our model, In the Bull case scenario, NIFTY has a very low probability of crossing the all-time high of 18604.45 in the coming 6-9 months. If we take into consideration upcoming rate hikes, US Recession fears, and valuations, our view is positive on NIFTY but we believe only single or lower double-digit returns can be achieved in the next 6-9 months from the current levels. In other words, it is most likely to witness time correction going ahead amid mentioned economic uncertainties. So, for better risk-reward one can use a dip or correction in Nifty levels to deploy large capital for long-term gains or one can use stock specific investment approach to invest in markets.
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Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.